I am returning to blogging after
a long hiatus. It is usual in life that
we face intervals of disturbing events and confused priorities. Now
that the dust is settling down I am slowly picking up the threads and I am
coming back to my passion, Technical Analysis.
I am sharing some thoughts on the ADX indicator.
ADX is one of the very popular indicators and widely used by technical analyst.
Dr. Charles Schaap’s book “ADXcellence”
deals with different strategies of trading with ADX. Then there a commercial
product called Super ADX which the sellers claim is a leading indicator though
the ADX by itself is a lagging indicator. Also I do not know how much of it is
based on real ADX other than they have an indicator called supporting ADX.
Anyway soon I will release a clone of the so called Super ADX. I also had released a Gaussian smoothed ADX
called KADX which was more sensitive and smoother than the conventional ADX. ADX
is a useful indicator to measure the strength of a trend. ADX by itself is a
non directional Indicator and does not indicate if the trend is up or down. We
use two other indicators called the +DI and -DI to reveal which trend
direction. I will not go into further details as most of you, readers of this
blog, will be familiar with the ADX indicator.
As many of you may be aware the
importance I provide for the volume in my analysis. Any move of a stock which
is not aided by volume will not last. Volume is the fuel for any trend. So
naturally any trend strength indicator without consideration of the volume
cannot provide the real picture. The ADX calculation totally ignores volume and
purely based on the price movement.
Price action combined with volume would be definitely provided a more
realistic picture. This thought has inspired to experiment with the ADX to
include the volume aspect. The basis for
the ADX calculation are the difference between the High of a day and the High
of the previous day and also the difference between the low of the day and low
of the previous day. In other words it uses the momentum of the Highs and Low.
This momentum is fuelled by volume. So we will add a volume factor to this
momentum. To calculate the volume factor we take the ratio of the current
volume and the average volume. We will bias the momentum of the Highs and Lows
with this volume factor. The remaining of the calculation will be based on
these biased values and the final ADX, +DI and –DI values will be biased by volume.
The result of this is quite evident from the chart below. The resultant +DI and
–DI are much more responsive to the volume and they clearly indicate which
moves are volume driven and which are not.
The ADX also quickly increase in values when the volume increases
indicating increased trend strength.
